Economies of Scale in Physician Practice

Abstract

A potentially important source of productivity gains in physician practices is larger practice size. We investigate economies of scale in physician practices using a large nationwide survey of self-employed physicians. When output is measured by practice revenues, we estimate significantly increasing returns to scale for single-specialty practices, implying that forming larger practices lowers costs. The lowest-cost practice size is estimated to be 5.2 physicians compared to a sample average size of 2.4 physicians. On average, scale inefficiency is estimated at 9%. Measuring output by physician office visits, we find that group physicians provide 17% more office visits than solo practitioners, controlling for practice inputs, and physician and practice characteristics. Physicians practicing in mid-sized groups of three to four are the most productive, providing 21% more visits than solo, Physicians. If all physicians practiced in the most productive group size, average office visit productivity would rise by 13%.